It’s crucial that retirees take full advantage of every available tax break they can. This is especially true if you’re on a fixed income; you need that money to last, so every cent counts. But holding on to your money during retirement is easier said than done. It’s easy to miss valuable tax-saving opportunities (i.e., opportunities to save money). It’s important to pay close attention to your tax situation. Also, learning about oft-overlooked tax breaks for retirees could help. And that’s exactly what we’re going to teach you about today. Keep reading.
Larger Standard Deduction After Age 65
When you reach retirement (age 65), your standard deduction actually increases, leaving more money in your pocket. For example, in 2023, the standard deduction for a single taxpayer stood at $13,850. For joint filers, meanwhile, it was $27,700. Once you turn 65, your standard deduction increases by $1,850 for a single filer, or $1,500 per-spouse for married filers.
Larger HSA Limit After Age 55
For those aged 55 and up, the contribution limit to health savings accounts increases by $1,000. This adjustment enables retirees to set aside more for healthcare costs. Healthcare costs often rise during retirement, so the larger HSA limit provides an opportunity for retirees to save adequately for these expenses. For example, a retiree in the 24% tax bracket could save an extra $240 in taxes due to the increased HSA limit. This exemplifies the importance of healthcare savings, especially during retirement.
Higher Tax-Filing Threshold In Retirement
The tax-filing threshold is a minimum limit of gross income that an individual must reach before they have to file a tax return. Fortunately, this threshold is elevated for retirees. In 2023, the threshold for seniors aged 65 and up is $14,700 for single filers or $28,700 for joint filers, provided they’re both 65+. Prior to reaching age 65, the threshold is $12,950 and $25,900, respectively. This higher threshold could help retirees avoid having to file a tax return at all.
Make Catch-Up Contributions
Catch-up contributions allow individuals aged 50 and up to contribute more than the regular limits to their retirement accounts. Maximizing these contributions could be significantly beneficial. For instance, the 401(k) catch-up contribution limit stands at an additional $7,500 in 2023. This could lead to significant extra portfolio growth in the long run.
Elderly Credit
Certain taxpayers aged 65+ are eligible for the elderly credit, a tax break that could mitigate the amount of tax owed up to $7,500. To qualify for this credit, Individuals with no dependents must have a gross income lower than $17,500. If you’re married and filing jointly meanwhile, assuming both spouses are over age 65, your gross income must be less than $25,000.
IRA Deduction
An IRA deduction can allow those who have an IRA aged 50 and up to increase their deduction amount by an extra $1,000, depending on your filing status and your adjusted gross income. This means that a retiree in the 22% tax bracket may be able to save an extra $220 on their tax bill.
Qualified Charitable Distributions
Qualified charitable distributions refer to distributions from an IRA paid directly to a charitable organization. You see, these distributions can be done tax-free, reducing a retiree’s taxable income. As an example, a $5,000 distribution made by a retiree to a charity could potentially reduce their taxable income, allowing someone in the 24% tax bracket to save up to $1,200 in taxes.
Taxes and Retirement in 5 Steps
Utilizing tax breaks, among other ways of shielding your money against taxes is crucial when planning for retirement. In order to properly prepare for taxes in retirement, you need to:
Understand the tax implications of your retirement income streams. Determine what your different income sources will be in retirement, such as Social Security benefits, pensions, and IRA/401(k) withdrawals. Then, learn about how each income source is taxed. For example, Social Security benefits may be partially taxable depending on your provisional income. Traditional IRAs/401(k)s are typically taxed as ordinary income.
Anticipate RMDs. After reaching age 73, you will be faced with required minimum distributions (RMDs). Consider the effect that these withdrawals will have on your taxable income.
Aim to stay within certain tax brackets to optimize tax efficiency. Spreading withdrawals over multiple years may be able to help minimize the impact of higher tax rates.
Create a tax-efficient withdrawal strategy. To provide flexibility, utilize tax-deferred and/or tax-free accounts. Then, assess which accounts to draw from first and how much to withdraw to minimize tax implications. Consider utilizing investments that generate minimal taxable income, such as municipal bonds or certain types of index funds.
Continuously review and adjust your plan. Be aware of any changes in tax laws that might affect your retirement strategy. Adjustments might be necessary over the years as they change. Additionally, your financial situation and retirement goals may change over time. Periodically review your retirement strategy to ensure it aligns with your current situation.
If you’d like to discuss your retirement goals and learn more about tax-free or tax-deferred retirement strategies, reach out to us. Attend one of our events or call us directly to schedule an appointment. However, with tax questions you should consult a qualified tax professional.
Source: Yahoo Finance
